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March 6, 2018

 

When Assets Pass to your Spouse Without an Estate Plan

I’m often asked what happens when you (a Minnesota resident) allow your assets to pass to your spouse without putting an Estate Plan in place.  Few people understand the significant ramifications of failing to put a plan in place.  This article will demonstrate what can happen.

 

When a person dies without having an Estate Plan in place, they are said to have died intestate. “Intestate succession” are the rules of the state court that dictate how a person's assets will pass when they die without an Estate Plan. Although generally the courts attempt to make uniform the law among states and various jurisdictions, The rules of intestate succession may vary from state to state.

 

Typically, if someone dies intestate or without an Estate Plan, their assets would pass to their spouse as long as all children of the deceased are also children of the surviving spouse.  If the decedent has children that are not children of the surviving spouse, the rules change. For example, the surviving spouse who has children from a previous marriage that are not children of the deceased, would receive $150,000 +1/2 of any balance of the estate then the remainder to the decedents descendants.

 

In any event, the majority of the estate if not all, would pass to the surviving spouse.

 

This means that upon death, the surviving spouse receives full control of the assets. The surviving spouse may do whatever he or she wants with the assets exposing them to risk of bankruptcy, creditors, and lawsuits. Further, the surviving spouse can gift the assets to a new boyfriend or girlfriend, a new spouse a charity or really anyone. And if the surviving spouse is financially challenged or vulnerable to poor lifestyle decisions, the assets are further at risk.

 

Maybe you think your spouse would do the right thing.  But, what if your surviving spouse’s memory fails or he/she becomes vulnerable in old age?  Are you okay with knowing your hard-earned money could be gobbled up by a voluptuous predator with big blonde hair and an agenda?  Do you want an Anna Nicole-like figure to make out with your wealth?

Gentleman, let’s say you pass before your wife.  Your grieving wife decides to get away to Mexico to take some weight off of her mind.  While in Mexico and after a few margaritas, she meets Pedro, the cabana boy.  He learns of her recent misfortunes and decides to take advantage of them.  The next thing you know, your wife is financing Pedro’s life-long dream of owning his very own wind-sailing business.

 

Maybe your spouse isn’t the type to replace you with a younger model when you pass, but what if he/she is financially challenged?  Could retail therapy become his/her coping tool?  Is she inclined to spend your wealth on a Jimmy Choo and Louboutin marathon?  Does he have a flair for expensive watches, gambling and sports cars?  If you were the party in your relationship who handled the finances, these are real considerations. 

 

If your spouse were to mismanage your estate and file bankruptcy or end up with a judgement against her/him, your assets are at risk to creditors.

 

If you're a business owner, or a professional practitioner, there are additional concerns.   Any claim made against your business or your practice could result in a judgment. Because the assets are not protected by a trust, those assets can be used to pay down a money judgment.

 

I’ll give you an example: Let’s say Doctor Johnson creates a will for his family.  He passes away and then his estate is sued.  The former patient sues his estate claiming that he engaged in medical malpractice.  If his former patient wins, the patient can then take all of the assets away from the family to pay down the judgment and his family could potentially be left with nothing.  Alternatively, had he created a trust, his assets would have been protected and the former patient who won the lawsuit could not have accessed any of his family’s assets.  The same is true of any ownership interest in a business. 

Now you can see that Trust-based planning is critical for business owners and professionals who face more exposure of lawsuits than the average employee.

The good news is that you can protect your assets from risk of:

  • Bankruptcy

  • Judgments

  • A Financially Challenged Spouse

  • Being Gifted to a new Spouse or Boyfriend/Girlfriend

 

By creating a Trust-Based Estate Plan, you can protect your assets. A trust or in some cases, a series of trusts, can be used to provide protections from the above scenarios.  Terms of the trust will dictate how your assets are used.  By creating marital, family and descendants’ trusts, you may ensure your assets are only used for health, education and maintenance.  Maintenance is for the most part, anything consumable.  It is NOT gifting or investing.  Thereby, the assets within the trusts cannot be gifted to a new spouse or used to invest in Padro’s windsailing business. There’s more:  the magic words “healthcare”, “education” and “maintenance” excludes creditors so the assets in the trust are protected from bankruptcy and judgments.

An experienced EP attorney can design a Trust-based plan to put protections in place to ensure your money passes to your loved one and is not gouged by the Anna and Padros of the world.

 

If you’re a high net-worth person, things get even uglier without a trust-based Estate Plan.  Not only do you have to worry about opportunists or the poor spending habits of your spouse, now you’ve got a bigger, more aggressive enemy that wants your hard-earned wealth:  The government!  This is because the government assesses a tax when you die.

If your estate is valued over 5,450,000.00 in 2016, your heirs should be prepared to hand over a large portion of your wealth to the IRS.